North Carolina is currently facing a crisis in the solvency of the state’s unemployment insurance trust fund, says a new report, a system designed to enable jobless workers to maintain economic security as they look for new jobs while also ensuring that the economy can recover during a time of massive job displacement.

The Great Recession has only further demonstrated the importance of unemployment insurance to workers and the economy as a whole, according to a new report released Friday by the Budget & Tax Center, a project of the NC Justice Center. Yet state legislators’ decision to cut employer contributions to the trust fund in the 1990s along with the historic job loss has resulted in an insolvent trust fund for North Carolina, the report said.

Initially conceived after the Great Depression to support workers who lost their jobs through no fault of their own, the unemployment insurance system was to be funded by employers contributing to a trust fund in good times so that funds would be available for jobless workers in bad times when payrolls shrink and layoffs increase. This type of “forward-financing” creates an unemployment insurance system that protects the overall economy – workers and businesses included – particularly during downturns, the report said.

North Carolina abandoned the design of forward-financing in the 1990s, and in turn, failed to build an adequate balance for the fund before the recession, leading to rapidly diminishing funds even as unemployment soared. North Carolina was forced to borrow money from the federal government starting in 2009, the report said, and as of May 2012, the state has borrowed $2.4 billion in funds.

“North Carolina’s UI trust fund insolvency did not happen overnight,” said Alexandra Forter Sirota, director of the Budget & Tax Center and author of the report. “As policymakers seek to improve the solvency of the unemployment trust fund, they must build a system that better weathers economic downturns by ensuring adequate fund levels to reduce the reliance on borrowing to meet benefit payments during times of economic trouble.”

A proposal by the NC Chamber of Commerce suggested reducing the duration of state unemployment insurance payments from 26 to 20 weeks as a means of addressing the solvency issue. Such a move could harm workers who have been unemployed the longest and are likely facing additional barriers to re-employment, particularly workers who are older, from communities of color, and come from industries in structural decline.

The report also recommends maintaining the system’s ability to support the economy with wage-replacement levels that are adequate to support workers seeking work. As it stands, unemployment insurance payments on average represent just 37 percent of workers’ previous earnings. The report recommends that lawmakers maintain an effective wage-placement level and achieve a target of 50 percent of previous earnings.

“The solution to North Carolina’s solvency crisis does not rest with cutting benefits and further undermining the system’s function replacing lost wages and ensuring the economy in a downturn,” Sirota said. “Policymakers must adopt a forward-financing approach that adequately funds the system in good times by ensuring full participation by employers and replaces wages to support working families and their ongoing participation in the economy and labor market.”